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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI R. C. SHARMA, AM & SHRI AMARJIT SINGH, JM
Assessee by: Rajeev Khandelwal Department by: Shri V. Vidyadhar (DR) Date of Hearing: 20.04.2018 Date of Pronouncement: 31.05.2018 O R D E R
PER AMARJIT SINGH, JM:
The present appeal has been filed by the assessee against the order dated 30.03.2016 passed by the Commissioner of Income Tax (Appeals)-9, Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the assessment year 2009-10.
The assessee has raised the following grounds: -
L The Commissioner of Income-tax (Appeals) - 9, Mumbai [hereinafter referred to as the CIT[A) erred in upholding the action of the Assistant Commissioner of Income-tax - 4 (2)- Mumbai (hereinafter referred to as the Assessing Officer) in disallowing loss Rs 2,26,31,095 arising on sale of Dehradun unit. The appellants contend that on the facts and in the circumstances of the ease and in law, the CIT(A) ought not to have upheld the action of the A.Y.2009-10 Assessing Officer in disallowing loss arising on sale of Dehradun unit inasmuch as the Assessing Officer has not correctly appreciated the facts of the case in its entirely and hence, the said disallowance requires to be deleted.
2. The CIT(A) erred in upholding the action of the Assessing Officer in disallowing expenses incurred for earning dividend income by invoking the provisions of section 14A read with rule 8D(2)(iii). The appellants contend that on the facts and in the circumstances of the case and in law, the Assessing Officer ought not to have made the impugned disallowance inasmuch as the same is not in accordance with the prescription of section 14A road with rule 8D(2)(iii). The appellants further, contend that the calculation of the disallowance is not in accordance with the provisions of rule 8D(2)(iii). The appellants crave leave Jo add, to, after or alter the aforestated grounds of appeal.”
3. The brief facts of the case are that the assessee filed its return of income on 25.09.2009 declaring total income to the tune of Rs.1,37,98,860/-. The return was processed u/s 143(1) of the I.T. Act, 1961 accepting the return income. Thereafter, the case was selected for scrutiny and notice u/s 143(2) of the Act dated 20.08.2010 was issued and served upon the assessee. Subsequently, notice u/s 142(1) of the Act was issued and served upon the assessee. The assessee company was carrying on the business of manufacturing pharmaceutical Formulations and selling locally and Exporting of pharmaceutical products. On valuation of closing stock, it was found that the assessee did not add the excise duty of Rs.23,31,559/- to the value of closing stock on 31.03.2009. Therefore, the noticed was given and after getting the reply the said amount was added to the valuation of closing stock. The assessee also claim the loss of sale Dehradun unit to the tune of Rs.2,26,31,095/- which was disallowed ITA. No.3519/M/2016 A.Y.2009-10 and added to the income of the assessee. The assessee has also earned the dividend income to the tune of Rs.12,00,000/-, therefore, the AO applied the provision of Section 14A r.w. Rule 8D of the Act and assessed the expenses to earn the exempt income to the tune of Rs.14,51,810/-. The total income of the assessee was assessed to the tune of Rs.4,06,95,650/-. Feeling aggrieved, the assessee filed an appeal before the CIT(A) and the CIT(A) partly allowed the claim of the assessee who did not allow the claim of the assessee on the ground of mentioned above, therefore, the assessee filed the present appeal before us. ISSUE NO. 1:- 4. Under this issue the assessee has claimed the confirmation of the disallowance of loss to the tune of Rs.2,26,31,095/- arising on sale of Dehradun unit. The contention of the assessee is that the assessee decided to set-up a manufacturing unit/factory at Dehradun, Himachal Pradesh/Uttrakhand. With a view to expand the existing line of business and to capital on the cost of benefit scenario which was in existence, if the pharmaceutical products were to be manufactured in the state of Himachal Pradesh/Uttarakhand. The Central Excise Duty was @ 16% all over the country whereas the Excise Duty was Nil in the Himachal Pradesh/ Uttarakhand. In view of this scenario the assessee decided to set-up the plant at Dehradun and started setting of plant and machinery w.e.f. for the period 31.03.2008 onwards. It is A.Y.2009-10 also contended that the Central Government reduced the Excise Duty from 16% to 8% all over the country. This had the effect of not only the surplus getting considerably eroded but the assessee would have incurred a loss if they would have gone ahead with the manufacturing of pharma products at Himachal Pradesh. Thus, the expansion plan to go ahead with the project at Himalchal Pradesh became unviable. In view of this, the assessee decided to sell the factory building together with land, plant and machinery, furniture fixture and so on. The assessee had suffered a loss to the tune of Rs.2,26,31,095/- on sale of this unit which was disallowed. The assessee claimed the same as business loss whereas the AO as well as the CIT(A) arrived at a conclusion that it is a capital loss, therefore, no business loss is liable to be allowed. However, the DR has strongly relied on the order passed by the CIT(A) in question.
On the other hand, learned AR relied on the decision of the Calcutta High Court in case of Binani Cement Limited 60 Taxmann.com 384 in support of the proposition that loss on abandoned project was liable to be allowed as business loss. Reliance was also placed on the decision of Hon’ble Supreme Court in case of A. Gajapathi Naidu 53 ITR 114 and Swadesh Cotton and Flour Mills 53 ITR 134.
We have considered rival contentions and carefully gone through the orders of the authorities below. We had also deliberated on the judicial pronouncements referred by lower authorities in their ITA. No.3519/M/2016 A.Y.2009-10 respective orders as well as cited by learned AR and DR before us, in the context of factual matrix of the case. From the record, we found that assessee is engaged in the manufacture of pharmaceutical formulation. They are contract manufacturers, that is, they manufacture medicines for domestic and multinational pharmaceutical marketing companies. The assessee decided to set up a manufacturing unit/ factory at Dehradun, Himachal Pradesh with a view to expand the existing line of business and to capitalise on the cost-benefit scenario that was in existence, if the pharmaceutical products were to be manufactured in the state of Himachal Pradesh. For this purpose, the assessee purchased a plot of land at Dehradun to set up a factory. The purpose of assessee was to get benefit of low tax at Himachal Pradesh where duty was Nil. In order to set up a manufacturing unit at Dehradun, there were various outlays namely, salary, electricity, plant and machinery, furniture fixture and so on. These outlay were being debited to capital wok- in -progress which is appearing in the balance sheet of the assessee till the immediately preceding previous year that is, 31st March, 2008. The Central Government then came up with a notification whereby central excise duty on manufacturing of pharmaceutical products was reduced from 16% to 8% all over the country. Due to this notification, there was no viability in the project itself. This had the effect of not only the surplus getting considerably eroded but the assessee would have incurred a loss if they would have gone ahead with the manufacturing of pharma products at Himachal A.Y.2009-10 Pradesh. Thus, the expansion plan to go ahead with the project at Himachal Pradesh became unviable. In view of this, the assessee decided to sell the factory building together with land, plant and machinery, furniture fixture and so on.
As a result of the same, assessee had suffered a loss of Rs. 2,26,31,095/- which was debited to the profit and loss account. AO disallowed loses on the plea that it was not genuine and also in the nature of capital loss not allowable u/s.37 of the Act.
There is no dispute to the fact that the assessee has been showing the capital work-in-progress under reference in the balance sheet for the years ended 31st March, 2007 and 31st March, 2008. The Assessing Officer has accepted the capital work-in-progress in the earlier years and hence, cannot at the time of sale, doubt the genuineness of such capital work-in-progress. The sale deed so entered was registered with the Sub-